Gold yet to shine, though Aussie miners doing well

Gold, usually a safe haven in times of crisis, has increased in value only marginally this year despite the widespread turmoil that has rocked global markets.

But one bright side for the precious metal as that in Australian dollars the gold price held up well over 2015, due to the local currency declining against the greenback. This has ensured a good start to the year for Newcrest and other local gold companies.

Gold rose 17 per cent in the first quarter, its biggest gain since 1986, and is up 21 per cent this year.

Photo: Bloomberg

Bullion is currently at $US1108.32 an ounce – up 4.4 per cent from the start of the year when it was $US1061.42 – and still well below levels it was trading at for most of 2015. Gold, in US dollars, declined nearly one-fifth in 2015.

"There are a number of risks to growth and economic development around the world, but they are insufficient to have a widespread impact to propel the price of bullion," said the director of investments and portfolio strategy at Market Vectors, Russel Chesler.

Gold, in US dollars, declined nearly one-fifth in 2015. But in Australian dollars the gold price has held up well.

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"In our view, gold and gold stocks are unloved and oversold. While it seems the market can't go lower, it finds new lows."

Mr Chesler said the current period of 2012 to 2015 was one of the worst bear markets for gold and gold stocks, as measured by peak-to-trough performance in percentage terms.

Gold in 2012 reached highs of over $US1770 per ounce.

"Given the depth and duration of this bear market, using past markets as guides suggests this market should begin to improve in 2016. We see 2016 as a year when many of the headwinds to the gold price should begin to ease particularly with greater macro-economic risks."

Tough to call

UBS commodity analyst Daniel Morgan said that gold was a "tough commodity to call".

"It's probably got more forces acting on it than any other," he said. "I would say that gold has performed reasonably well in the last few weeks relative to other asset classes. If you've been holding gold or gold equities you'd be pretty happy."

Mr Morgan said UBS had forecast gold to reach $US1250 some time this year, although he acknowledged that a lot of things were "in flux", including the number of interest-rate rises from the US Federal Reserve.

"This year is obviously very turbulent with lots of volatility," he said. "But I think gold will outperform on a relative basis many of the more industrial metals."

Citi have given gold a 7.5 per cent upgrade, according to a recent note, forecasting the precious metal to average $US1070 per ounce in 2016.

"Gold's safe haven rationale is back in vogue for the time being on fears of further China macro contagion, whipsaw equity markets, and geopolitical issues in the form of rising Arabian Gulf tensions."

Citi analyst Trent Allen said the gold price this year would be very uncertain. "Anyone who knows what the gold price is going to do this year is having themselves on."

Although the gold price fell heavily in US dollar terms in 2015, in Australian dollar terms it has held up, now trading at around $1570 an ounce.

"We're happy to see that Australian gold producers, with the tailwind for the currency, are making good free cash at the moment," he said.

"To produce an ounce of gold in Western Australia at the moment will cost you about $1000 per ounce in sustaining costs.

"Even if you add another $100 per ounce or $150 per ounce for extra corporate costs or non-sustaining capital expenditure, you're still making a solid $400-per-ounce margin.

Open an ice-cream shop

"If you can't make money at this Australian-dollar gold price you should probably open an ice-cream shop."

Mr Allen said the depreciating Aussie had been a been a great boon to local miners, not only of gold but of other metals.

For Australian gold and base-metal companies ranked by Citi, Independence Group, Medusa, OZ Minerals and Resolute are a buy; Newcrest, Western Areas, Sandfire, Regis, Perseus, OceanaGold, Northern Star and Beadell are neutral.

Mr Chesler produced a similar assessment.

"We have a neutral-to-positive outlook for Australian gold miners for the coming year; gold equities have never been cheaper relative to the gold price," he said.

"Australian gold companies have made significant changes to the way they run their businesses over the last couple of years, which has led to a reduction in costs, improved capital allocation, lower debt, and an overall healthier sector. Lower fuel prices and a weaker Australian dollar are also having a positive impact on costs of production."